US equities have slumped 1% and US treasury yields have rallied hard after President Trump’s comments to reporters about the US-China trade deal. Reaction in currency markets has been more muted. Modest USD weakness has prevailed, helping keep the NZD’s head above the 0.65 mark.
US trade wars across various fronts have been in focus over the past 24 hours. We use the plural as other countries have been engulfed, not just China. Yesterday we reported Trump’s re-imposing of aluminium and steel tariffs on Argentina and Brazil, after making the spurious claim that those countries had presided over a massive devaluations of their currencies, which hurt American farmers. Soon after we went to press yesterday, the US trade office initiated a process to increase tariffs rates on EU imports following another “win” at the WTO on EU subsidies being directed towards Airbus. Furthermore, the US proposed tariffs on $2.4b of French products in response to a tax on digital revenues imposed on US tech companies by France, possibly as high as 100%, and looked to broaden its punitive tariffs on other EU products — including from the UK, France, Spain and Germany.
In news overnight, President Trump told reporters that he had no deadline on a US-China trade deal and that he liked the idea of waiting until after the election for the deal. He claimed that the deal was all about his decision “do I want to make it?”, again suggesting that China needed a deal more than the US, which was “doing very well”. US Commerce Secretary Wilbur Ross told CNBC that the US will go ahead with another round of Chinese import tariffs due 15-December if nothing changes in the next two weeks and that the US also has “more ammunition” against China on the trade front.
The US equity market has been buoyant recently, in anticipation of better news on the trade war front, so it was hit hard by Trump’s comments on China. The S&P500 is currently down about 1%. European equities have fared better, with the Euro Stoxx 600 down by “only” 0.6%. The reaction in the US treasuries market has also been significant, with the 2-year rate down 7bps to 1.53% and the 10-year rate down 12bps to 1.70%. The market is rightly taking the view that more tariffs are simply a tax on the US economy and therefore negative for growth, which might require some offsetting monetary policy support. The “shooting itself in the foot” theory is evident when we look at currency markets, with broad-based weakness for the USD – so no sign of the conventional risk-off support normally seen for the greenback.
The NZD was on a roll ahead of Trump’s comments, reaching a fresh 3-month high of 0.6533 but damage has been limited to 20pips or so and it trades this morning at 0.6515, still some 0.3% higher than this time yesterday. Unlike equity markets, currency markets haven’t factored in any near-deal US-China trade deal, evident by the NZD’s extreme level of cheapness on our short-term fair value model. The GDT dairy auction was softer than expectations, with the price index falling slightly (weighed down by butter prices), but this follows a strong improvement in pricing over recent months. Whole milk and skim milk powder prices were up 0.1% and 1.9% respectively. In data released early this morning, annual QV house price inflation rose to a 12-month high of 3.3%, fuelled by lower interest rates.
The AUD has followed a similar pattern, reaching an overnight high of 0.6862 and slipping a little to 0.6840. The currency got some support from the RBA statement, which perhaps wasn’t as dovish as some were picking. An easing bias remains evident, with the policy paragraph including comment on the “long and variable” lags of monetary policy, suggesting the Bank is prepared to be patient in assessing the impact of its recent 75bps of easing before adding any further stimulus.
The risk-off tone to markets sees JPY well supported, with USD/JPY down 0.4% to 108.50 and NZD/JPY falling from 71.25 to 70.70 after Trump’s comments. GBP remains well supported ahead of next week’s election, with GBP/USD trading back up through 1.30. EUR has been a bit of a laggard, barely rising against the weak USD. Bloomberg reports that ECB officials “face increasing pushback against their negative interest rate policy in private engagements with the region’s finance ministers”, with complaints about the detrimental impact on savings and pension systems.
The NZ rates market sold off yesterday and the curve steepened, with 2-year swap up 3bps to 1.21% and the 10-year rate up 9bps to 1.64%, both closing at levels not seen since early August. While a sell-off in the Australian rates market was a factor, reduced conviction in any further RBNZ easing against a backdrop of easier fiscal policy and improved economic data are also factors bubbling away under the surface. Some reversal of those moves will occur on the market open today, with Australian 10-year futures down 6bps in yield terms since the NZ close.
In the day ahead, RBNZ Governor Orr speaks at a Parliamentary committee on the Financial Stability Report, where we don’t expect to hear much new. Australian GDP for Q3 is expected to be sluggish at 0.5% q/q, a little below RBA expectations. Tonight, the Bank of Canada is expected to leave monetary policy unchanged, with focus on the tone of the Statement, which is expected to remain cautious about the outlook. The key data release is the US non-manufacturing ISM composite, with expectations of a fairly flat result on the previous month. A lurch down would raise a question mark on the domestic US economy.